Managing your finances with an ongoing Personal Loan

Managing money is an ongoing process, and often, an intricate one. Well-planned money management meets short-term and long-term goals with ease and does not let money or its absence hinder your happiness as you work hard to build a solid future.

When managing your financial resources, you need to evaluate and balance your income, expenses, saving, etc. At the same time, your finance revolves around many aspects such as a mortgage, asset, investment, debts, and budget. When you set out to create a budget, you streamline all of these aspects. However, you may require a supplementary fund to meet an unexpected economic situation even with a well-curated financial plan.

While various financial instruments are available to fulfil your necessities, a Personal Loan is perhaps the most sought-after; but suitable financial planning around your current personal loan is crucial. Here are a few pointers to consider when budget planning with an ongoing personal loan.

Debt-to-Income Ratio

The debt-to-income (DTI) ratio is the first criteria the bank looks at before granting you a personal loan. This ratio evaluates your ability to service the debt and equates to the relationship between income and debt. Ideally, it should be around 28%. A low DTI ratio signifies the borrower is more comfortable repaying the debt.

How to calculate DTI:

DTI = Total monthly debt payment/gross monthly income

The best way to maintain a low debt-to-income ratio is to keep control of your expenses. As you plan your expenses, you will be able to pay all your instalments on time.

Financial Surveillance

The ongoing process of impulsive buying often extends the budget threshold. Analysing and taking stock of your expenses is the best way to understand where you are spending your money and ensures you avoid unnecessary expenditure. A tried and tested rule is to write down all your expenses and prioritise according to your requirements. See where you can curtail unnecessary spending. Setting and sticking to a predefined budget is helpful, especially if you have a personal loan. However, your budget must be flexible and adaptive to your income and expense changes.

Pay High-interest Loans Foremost

It is advised that you pay your high-interest loans first. Carrying a high-cost loan could add pressure to your financial plans. An accumulated interest can be burdensome in the long term and could easily lead to further financial stress.

Consolidate Your Debt

You can look at debt consolidation if you are burdened with substantial personal loan debts and your credit card dues are still outstanding. You can consolidate all your debts into one loan to ease your financial hardship. Here, multiple debts are combined into a single, larger debt, making it easier for you to pay your loan to one lender with a lower rate of interest.

Make Prompt Reimbursement 

It may be tempting to spend your bonus or windfall gain from an investment on goods and services. But if you have to service EMIs, it is advisable to reduce your debt first. Any windfall can be allocated to debt repayment. The good news is that almost all financial institutions permit premature loan repayment without imposing penalties or charging minimal fees.

Do Not Delay

Repay the debt as soon as possible. The timely service of EMIs maintains your credit score and reduces your debt. You may eventually request a lower interest rate with a good track record and credit score. Paying late distorts your credit score, attracts late payments and dishonouring charges from the bank. Switch loans if there is a better deal. A sweeter deal with low interest is attractive but check the earlier repayment charges of your current lender and the processing fee of the intended banker as well.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.